For the third time in three weeks, Wall Street gave a thumbs down to New Jersey’s fiscal management, as Fitch Ratings yesterday followed Standard and Poor’s in downgrading the state’s credit rating to single-A status — higher than only Illinois and California.
Fitch’s decision to downgrade New Jersey’s bond rating echoed S&P’s April 9 announcement in its criticism of the state’s growing pension and retiree healthcare liabilities, high levels of debt, overly optimistic revenue estimates, and reliance on one-shot gimmicks that add to future budget problems.
Like Moody’s, Fitch said it fully expects the Christie administration to rely on more one-shot gimmicks to fill the $807 million budget gap it announced Monday. Further, it expects that the budget-balancing maneuvers Treasurer Andrew Sidamon-Eristoff is expected to announce will make the state’s long-term fiscal situation worse.
Fitch’s decision to lower New Jersey’s bond rating will add to the state’s borrowing costs when it renews the Transportation Trust Fund next year and on other future bond issues.
The decision was not unexpected: It came just three days after Sidamon-Eristoff’s announcement that the state is facing an $807 million budget gap on top of the $694 million shortfall he had to close in March with a series of controversial maneuvers, including a $93.7 million retroactive cut in pension payments and a tobacco bond restructuring in which he traded $400 million in future revenue for a one-time upfront payment of $92 million.
Furthermore, Fitch’s noted that the “belated” discovery of the new budget gap leaves Gov. Chris Christie and the Democratic-controlled Legislature with few options to fill the deficit by the June 30 end of the fiscal year: School aid, municipal aid, and homestead rebates are already paid out. Tax increases could not be implemented quickly enough — even if Christie had not taken a “no new taxes” pledge — nor could layoffs. That leaves the $1.558 billion pension payment the state is scheduled to make in late June as the only large expenditure that could be reduced or pushed off into the next fiscal year.
In downgrading New Jersey’s bond rating, Fitch noted that it “considered the revenue forecast (by the Christie administration) to be aggressive, as has been typical for the state over the past several fiscal years,” particularly Sidamon-Eristoff’s projection of an 8.2 percent increase in income tax collections and the 21 percent rise in casino revenues it projected for the upcoming Fiscal Year 2015, which starts July 1.
Fitch’s said it expected Sidamon-Eristoff to be forced to make a significant cut in his $34.4 billion revenue projection for FY15, when he appears before the Assembly and Senate budget committees in late May because the state will begin the next fiscal year from “a substantially lower revenue base” — $807 million less – than Christie projected in his February Budget Address.
Not surprisingly, the chairs of those budget committees reacted sharply to news of yesterday’s bond rating downgrade.
Assembly Budget Committee Chairman Gary Schaer (D-Passaic) said “this is devastating news that reflects poorly on the governor’s fiscal management of this state and his reliance on short-term solutions.”
“This is yet another indication that we must seize this opportunity to work together in a bipartisan fashion to find solutions to New Jersey’s fiscal challenges and solve pressing needs such as transportation, open space, and higher education funding,” Schaer said, citing three major policy areas where new bond issues will be needed.
“I’m hoping Gov. Christie will recognize the extreme difficulties before us and understand the need to move forward and develop long-term solutions to our problems before we face even more negative ramifications such as this current downgrade,” he said.
Senate Budget Committee Chairman Paul Sarlo (D-Bergen) said Fitch’s announcement “is another bad grade for New Jersey that is a direct result of the governor’s fiscal practices, including the recent disclosure of a budget deficit of more than $800 million for a fiscal year with only two months to go.
“The ratings agency cited the governor’s overly optimistic revenue estimates and his repeated use of one-time gimmicks to combat shortfalls as the reason behind the downgrade,” Sarlo said. “It’s time for the governor to take off the rose-colored glasses, stop bragging about fantasy balanced budgets, and produce a realistic and responsible spending plan.”
The Treasury Department noted that the Christie administration has already announced “that it will take any and all actions necessary to offset revenue shortfalls to achieve a balanced budget as constitutionally required.”
The Treasury statement asserted that the latest budget shortfall “is not a New Jersey-specific problem, as many other states that are heavily dependent on income taxes, including Connecticut, Pennsylvania, Kansas and Michigan, face shortfalls of similar or even greater magnitude that defied predictive analysis.”
An estimated $700 million of the $807 million total shortfall is due to a plummet in state income tax collections, much of which is being attributed to an underestimation by treasury departments and legislative budget offices in various states of the amount of income that wealthy taxpayers shifted from 2013 to 2012 to avoid an increase in the top federal income tax bracket from 35 percent to 39.6 percent that went into effect January 1, 2013.